Technical Pound-to-Euro Rate Forecast for the Week Ahead

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Pound Sterling has retreated back into the middle of its stubborn, long-term range against the Euro, though we still project an upside breakout to materialise eventually.

Our technical studies of the GBP/EUR exchange rate confirms the longer-term sideways range remains in place and will likely dictate near-to-longer term direction as Sterling's most recent attempt to break out higher failed.

Having popped higher in the wake of the Bank of Englandpolicy event on Thursday, February 8 a break-out higher appeared to be underway. But, 24 hours later Sterling endured a spectacular capitulation on negative Brexit headlines and the pair now finds itself back in familiar territory.

While Brexit headlines are the fundamental driver of the move, we note that the price action reinforces a significant technical underpinning to this market which offers us some decent observations to predict further price action.

The exchange rate has now pulled back inside the range to a current market rate (at the time of writing) of 1.1310, right in the middle of the range between the ceiling at 1.15 and the floor at 1.12:

Although normally composed of five constituent waves, it is not always the case they are, and rangebound consolidations such can go on indefinitely.

Overall we are still longer-term bullish, however, expecting the range to eventually resolve in a breakout higher.

Our bullishness comes from the fact the pair has broken above a major trendline drawn from the 2015 highs (see below) which is a bullish indication in itself, and the look-and-feel of the chart itself which suggests the pair will probably go higher rather than lower.

In order to confirm a breakout from the range, we would ideally wish to see a bit more than simply a break above the last waves' range highs at 1.1513, on January 25.

This is due to the R1 monthly pivot at 1.1560, which is likely to present a significant obstacle to further upside, and ideally, we would want to see a clearance of that, signaled by a move above 1.1600 for confirmation of more upside, to a target at 1.1730.

Pivots are calculated from the previous month's price data and are levels where prices often stall, pull-back or even reverse.

Pivots present traders with an opportunity to sell (in the case of an uptrend) in anticipation of a pull-back, which adds to the supply at that level, further enhancing the bearish pressure.

On the topic of selling, we can report at the start of the new week that strategists with global investment bank Morgan Stanley have told clients that they are inclined to continue selling Sterling on strength.

"Sell the rally. Despite the BOE suggesting an earlier and more pronounced rate hike we warn against getting GBP bullish. The BOE has turned more rate bullish as it admitted that the growth potential of the economy has declined to 1.5%," say Morgan Stanley in a client briefing.

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Data and Events to Watch for the Pound

From a data perspective inflation and retail sales releases dominate the outlook for the Pound in the week ahead.

Inflation is a driver of interest rates which in turn influence the Pound, so a rise in inflation will lead to a stronger Pound. On Thursday, February 8 the Pound rallied as the Bank of England communicated that interest rates might have to rise faster than previously anticipated in coming months in order to combat persistently high rates of inflation.

The Bank and markets alike will therefore be watching the latest installment in UK inflation data to see where the trends lie, the release is due out on Tuesday, February 13, at 9.30 GMT.

Forecasters expect a 2.9% rise compared to a year earlier (yoy); in the previous month of December, the inflation rate was a higher-than-expected 3.0% (yoy).

On a monthly basis, inflation is expected to decline by -0.6% in January.

Core inflation, which strips out volatile food and fuel components, is forecast to rise by 2.6% compared to 2.5% previously; often it is this number that moves markets.

On all accounts, should the data come in below expectation we would expect Sterling to decline, and should data beat expectations we would expect Sterling to rise.

The other main release is retail sales, which is scheduled for release on Friday, February 16, at 9.30.

A higher-than-expected result could reaffirm the UK economy's resilience and support Sterling.

Retail Sales is forecast to rise by 2.6% in January compared to a year ago when it only gained by 1.4%. Month-on-month it is forecast to increase by 0.5% from -1.5% previously.

"Looking ahead, the UK's inflation and retail sales reports are scheduled for release and if the data surprises to the downside like we expect, it may be difficult for GBP to rally," says Lien.

Data aside, the other major factor for Sterling in the coming week is likely to be how Brexit negotiations evolve.

The Pound fell last week following the revelation that the EU was reconsidering whether to allow the UK a two-year transition phase deal after the official Brexit deadline in 2019, in order to help negotiate a new trade relationship.

After a breakdown in talks over the nature of the UK's rights during the transition period itself, Chief EU Brexit negotiator Michel Barnier said that if the disagreements continued it was "not a given" the UK would even get a transition period at all.

This took the wind out of Sterling's sails after it rose strongly following the Bank of England's positive assessment of the economy on Thursday.

"Instead of making progress this week, Brexit negotiations have taken a step back and to the dismay of sterling bulls, this overshadowed the BoE's hawkishness," concluded Lien.

Data and Events for the Euro

Eurozone GDP data is the main release in the week ahead when it comes out on Wednesday, February 14, at 10.00 GMT.

The consensus expectation amongst analysts is a 2.8% rise in the fourth quarter of 2017 from 2.7% previously.

The strong economic growth in the Eurozone is a major reason why analysts are so bullish the Euro, so an unexpectedly good result on Wednesday could lead to a rise in the Euro, whilst a lower-than-forecast result could put downwards pressure on the single currency.

The other key release, which is out at the same time as GDP data, is December industrial production, which is forecast to rise by 4.2% compared to a year ago, from a 3.2% in November.

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Spanish house prices are on the increase with the price of both new-build and existing stock rising by 2.6% quarter-on-quarter in the second-quarter 2018 and a leading Spanish bank say they expect the upward trend in Spanish real estate to continue into 2019.